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America Falling Behind on Corporate Tax Rates

While European nations cut taxes, U.S. loses competitive advantage

July 16, 2007

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WASHINGTON &#150; Average corporate tax rates in the United States have remained steady at the rate of 40% for the previous decade. In the meantime, tax competition in Europe has created a pro-growth binge of tax cutting, with rates falling from an average of 38% in 1996 to just 24% in 2007. The disparity has put the U.S. at a distinct disadvantage, according to a new bulletin from the Cato Institute.

In “Corporate Taxes: America is Falling Behind,” Daniel J. Mitchell, senior fellow at the Cato Institute, argues that it’s time for the U.S. to cut its corporate tax rates. “The U.S. corporate tax system is an anachronism that discourages growth and undermines job creation,” Mitchell says. “High tax rates are driving jobs and investment abroad.”

The United States is still an appealing investment location for a variety of reasons, but a high corporate rate is undermining overall competitiveness. There are valuable lessons to be learned from nations that have lowered their taxes and seen their economies boom. Ireland, Switzerland, Hong Kong, and Estonia are four countries Mitchell cites favorably for boosting their growth and increasing tax compliance by lowering their rates. He suggests that U.S. should follow suit it if wants to remain competitive.

“The corporate tax system is one area that needs radical improvement, one where lawmakers can learn lessons from Europe,” Mitchell concludes. “The longer that policymakers wait to cut the corporate tax rate, the greater the likelihood that the geese that lay the golden eggs will fly across the border.”